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Why Restaurant Stocks Climbed Again Thursday

By Jeremy Bowman – Jun 5, 2020 at 6:55AM

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Enthusiasm for the economic recovery lifted casual-dining stocks for the second day in a row.

What happened

Restaurant stocks gained for the second day in a row on Thursday as hopes of a quick recovery continue to hold sway. Investors seem to believe that the worst of the coronavirus effect has passed and that the economy is on its way to steady improvement, which now favors the sectors hardest-hit by the lockdowns. That includes consumer discretionary stocks like those in the restaurant and travel sectors.

Among Thursday's winners were Dave & Buster's (PLAY -1.97%), which finished up 22.4%, Ruth's Hospitality (RUTH -0.41%), which gained 9.6%, Denny's (DENN -2.88%), which closed 7.5% higher, and The Cheesecake Factory (CAKE -1.82%), which rose 7.6% on the day.

What was also notable was that the broader market was down for the day as the S&P 500 lost 0.3%. There was a clear rotation out of stocks that have done relatively well over the last couple of months, like the tech sector, and into beaten-down stocks, like restaurants, that will see business improve during the reopening.

A group of young people sitting around a table at a restaurant eating pizza.

Image source: Getty Images.

So what

There was no specific news out on these individual companies, but the group also rallied Wednesday after The Cheesecake Factory gave a business update that showed reopened restaurants would rapidly recover lost sales. 

The casual-dining chain said 25% of its restaurants had reopened as of Tuesday and that these locations had recovered 75% of prior-year sales -- even as sites enforce social distancing rules, limit seating capacities, and follow other such protocols according to local regulations. The company noted strength in its off-premises business and growth from dine-in customers. Restaurants that were doing only off-premises service generated sales at a rate of $4 million a year, or close to 40% of the usual total.  

Investors interpreted the news as a bullish sign for the industry and a reflection of pent-up demand for eating out. The casual dining stocks mentioned above all fell sharply during the sell-off, losing 50% or more. They mostly traded flat over the last couple of months, as the chart below shows. 

CAKE Chart

CAKE data by YCharts

Despite the broader stock market recovery, investors have been hesitant to get back in casual dining stocks. That seems to be changing following Cheesecake Factory's recent report. Other reports also point to an economic recovery. Housing demand appears to have come roaring back, and retail chains like those operated by The TJX Companies and Michaels have said that sales are up from a year ago at reopened stores, indicating pent-up demand in other consumer-facing areas.

Now what

Fast-food restaurants have mostly made a strong recovery in recent weeks as Americans have grown tired of cooking for themselves and miss the convenience of restaurants. Casual-dining chains are likely to experience a similar recovery if the reopenings continue to go smoothly. Though there are still about 20,000 new coronavirus cases reported daily, there have so far been no major spikes like the one in the New York area that overwhelmed local hospitals and led to tens of thousands of deaths.   

Restaurant investors will also keep an eye out next Thursday for Dave & Buster's first-quarter earnings report. Dave & Buster's shut down its locations in mid-March and has not yet announced a reopening. Commentary from management will shed light on how the hardest-hit chains are coping during the crisis.

As an eat-and-play brand, Dave & Buster's faces particularly difficult challenges ahead, as it will have to make patrons feel safe using shared arcade games. Whether customers come back to its locations may be a test for the broader restaurant recovery.

Jeremy Bowman owns shares of Dave & Buster's Entertainment. The Motley Fool recommends Dave & Buster's Entertainment, The Michaels Companies, and The TJX Companies. The Motley Fool has a disclosure policy.

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Stocks Mentioned

Denny's Corporation Stock Quote
Denny's Corporation
DENN
$9.46 (-2.88%) $0.28
Ruth's Hospitality Group, Inc. Stock Quote
Ruth's Hospitality Group, Inc.
RUTH
$17.18 (-0.41%) $0.07
The Cheesecake Factory Incorporated Stock Quote
The Cheesecake Factory Incorporated
CAKE
$29.89 (-1.82%) $0.56
Dave & Buster's Entertainment, Inc. Stock Quote
Dave & Buster's Entertainment, Inc.
PLAY
$31.40 (-1.97%) $0.63

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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